Written Representations Flashcards
When considering the use of written representations as audit evidence about the completeness assertion, an auditor should understand that such representations
A. Complement, but do not replace, substantive tests designed to support the assertion
B. Constitute sufficient evidence to support the assertion when considered in combination with the assessment of control risk
C. Replace the assessment of control risk as evidence to support the assertion
D. Are not part of the audit evidence considered to support the assertion
A.
During an audit, management makes many representations to the auditor in response to specific inquiries or through the financial statements. Such representations from management are part of the audit evidence the independent auditor obtains, but they are not a substitute for the application of those auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial statements under audit. Written representations from management ordinarily confirm representations given to the auditor, indicate and document the continuing appropriateness of such representations ,and reduce the possibility of misunderstanding concerning the matters that are the subject of the representations.
Key Co. plans to present comparative financial statements for the years ended December 31, year 7, and year 8, respectively. Smith, CPA, audited Key’s financial statements for both years and plans to report on the comparative financial statements on May 1, year 9. Key’s current management team was not present until January 1, year 8. What period of time should be covered by Key’s representation letter?
A. January 1,year7, through December 31,year 8.
B. January1,year7,through May 1,year 9.
C. January1,year8,through December31,year8.
D. January1,year8,through May 1,year9.
B.
If comparative financial statements are reported on, the written representations obtained at the completion of the most recent audit should address all periods being reported on. The representations should be made as of the date of the auditor’s report. If current management was not present during all periods covered by the auditor’s report, the auditor should nevertheless obtain written representations from current management on all such periods.
To which of the following matters would materiality limits not apply in obtaining written representations?
A. The availability of minutes of stockholders’ and directors’ meetings
B. Losses from purchase commitments at prices in excess of market value
C. The disclosure of compensating balance arrangements involving related parties
D. Reductions of obsolete inventory to net realizable value
A.
Written representations may be limited to matters that are considered material. Materiality limitations would not apply to those representations that are not directly related to amounts included in the financial statements, such as the availability of minutes of stockholders’ and directors’ meetings. Answers b., c., and d. relate directly to amounts in the financial statements and, thus, materiality limits would apply.
Which of the following matters most likely would be included in a representation letter?
A. An assessment of the risk factors concerning the misappropriation of assets
B. An evaluation of the litigation that has been filed against the entity
C. A confirmation that the entity has complied with contractual agreements
D. A statement that all material internal control weaknesses have been corrected
C.
Compliance with contractual agreements that may affect the financial statements is a matter ordinarily included in written representations. It is the auditor’s responsibility to assess the risk factors concerning the misappropriation of assets. An evaluation of the litigation that has been filed against the entity is a matter to be covered in a lawyer’s response to a letter of audit inquiry. Management is not required to correct all material internal control weaknesses.
To which of the following matters would materiality limits not apply when obtaining written client representations?
A. Violations of state labor regulations
B. Disclosure of line-of-credit arrangements
C. Information about related-party transactions
D. Instances of fraud involving management
D.
Because of the possible effects of fraud and the importance of management integrity on other aspects of the audit, materiality limits do not apply with respect to fraud involving management. This means that no incident involving management fraud may be ignored no matter how minor it may seem. Some instances of answers a., b., and c. may not be significant enough to matter.
A disclaimer of opinion or withdrawal from the engagement is required if a written representation requested from management relating to which matter is not provided?
A. For preparation and fair presentation of the financial statements and for information provided and completeness of transactions
B. Disclosure of knowledge of fraud or suspected fraud affecting the entity involving management, employees who have significant roles in internal control, or others when fraud could have a material effect on the financial statements
C. Management’s belief that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole
D. Management’s belief that the significant assumptions used by it in making accounting estimates are reasonable
A.
The auditor should disclaim an opinion on the financial statements or withdraw from the engagement if the auditor concludes that sufficient doubt exists about the integrity of management such that the written representations about management’s responsibilities, i.e., preparation and fair presentation of the financial statements & information provided and completeness of transactions, are not reliable or management does not provide these specific representations.
Editor note: US GAAS distinguish the written representations about management’s responsibilities in this manner from all other requested written representations because the possible effects on the financial statements in these circumstances are not confined to specific elements, accounts, or items of the financial statements and are thus pervasive.
The other answers are all the subject matter of written representations that are required, but not categorized as being about management’s responsibilities. If written representations related to these and other required representations are not provided, the auditor is required to determine the possible effect on the opinion.
The date of the representation letter should be as of the date of the
A. Balance sheet
B. Latest interim financial information
C. Audit report
D. Audit report release date
Answer c., the representation letter should be dated as of the date of the audit report.
For which of the following matters should an auditor obtain written representations?
A. Management’s cost-benefit justifications for not correcting internal control weaknesses
B. Management’s knowledge of future plans that may affect the price of the entity’s stock
C. Management’s compliance with contractual agreements that may affect the financial statements
D. Management’s acknowledgment of its responsibility for employees’ violations of laws
C.
Compliance with aspects of contractual agreements that may affect the financial statements is a matter ordinarily included in written representations. Management’s justifications for not correcting control weaknesses are primarily of concern to the audit committee, not the auditor. Generally, the auditor is not concerned with forecasts of the entity’s stock price. Management is unlikely to acknowledge any responsibility for employees’ violations of laws—merely responsibility for having reasonable controls in place.
Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit?
A. Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.
B. Management plans to expand into international operations during the next few years.
C. Management believes the financial statements are accurately stated in accordance with generally accepted auditing standards (GAAS).
D. Management believes the company is the premier company in its industry regarding service to customers.
The correct answer is (A).
A management representation letter is a form letter written by a company’s external auditors, which is signed by senior management. The letter attests to the accuracy of the financial statements that the company has submitted to the external auditors for their review. The management representation letter must include a statement that management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.
(B) is incorrect because there is no need for management to mention international expansion plans.
(C) is incorrect because management must state that the financial statements are accurately stated in accordance with GAAP, not GAAS.
(D) is incorrect because there is no such requirement for the management to include any such information which represents management beliefs about the company’s performance in the industry.
